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USAGOLD Daily Market Report: Pete Grant Reports... from China

During a two-week visit to China, our senior metals analyst, Pete Grant, shares his following daily insights and observations with these on-the-ground reports for the benefit of our clientele and the media. Please attribute quotes to Pete Grant at USAGOLD.com

(scroll down for most recent commentary -- here)

August 18, 2008

Firm Dollar Keeps Gold Under Pressure
(USAGOLD) CHINA -- I'm writing this morning -- actually my evening -- from the ancient walled city of Xi'an in the People's Republic of China. Xi'an is one of the most historically significant cities in China, having served as the capital for thirteen dynasties. It is the eastern terminus of the Silk Road and is the home of the famous Terracotta Warriors. Xi'an has more than 3,100 years of recorded history.

Much of that history includes gold. As early as 1091 BC, gold was used as money in China and both the yellow metal, and of course silk, traveled the Silk Road to points west in Egypt, India, Persia, Arabia, Byzantium and Rome.

This past Friday was a travel day for me and it looks like I missed some excitement. The decisive push below the $800 level was precipitated by persistent dollar strength, which has kept the pressure on commodity prices. However, gold has held support at 772.65 (21-Nov-07 low) thus far and has rebounded modestly as I write this report.

As stated in my long-term dollar perspective from last week, there doesn't appear to be any particularly compelling reasons to be long the dollar. The economic outlook in America remains dire. Much has been made of the export gains that have resulted from the dollar's steep drop over the past year. Suddenly more than half of that exchange rate advantage has disappeared. Not to mention that cratering growth elsewhere in the world means fewer buyers for US manufactured products. When exports start to contract, there's not much else propping up US markets.

Despite firmer banking share prices, the systemic risks remain substantial. It seems like it's been well over a month since I've read anything that suggests the worst of the credit crisis is behind us. In fact, there have been quite a few articles recently that suggest the crisis may only be half over.

The prospect of another year of tightening credit is likely to lead to more mortgage defaults and foreclosures. This will lead to additional pressure on home prices, which is ultimately the root of the crisis. As home values continue to slide, it will put additional pressure on the banks. There is a growing belief that we are in for additional bank failures. The vicious cycle rolls on.

As bad as the outlook for America is right now, Europe and the UK appear to be in even worse shape at this point. It is the unwinding of long euro and sterling trades that have been driving FX flows into the dollar. However, the greenback is not the safe-haven that it once was.

If you would like to broaden your view of gold market news and analysis, please feel welcome to join our free NewsGroup to receive by e-mail periodic gold news alerts, USAGOLD Market Updates, and relevant commentary like these.

With growth risks now evident globally, there will be increased pressures from all quarters to devalue currencies in the hope of bolstering exports. Several weeks ago, I was sticking to my guns and saying the Fed would be the last of the major central banks to raise rates. Now I think they will be one of the first to cut rates again.

The ECB, having just raised rates, will find it difficult to cut too quickly for fear of losing credibility. However, the Eurozone economy has just contracted for the first time in the history of the union. They may well have to cut rates as well. In another excellent article in The Telegraph by Ambrose Evans-Pritchard, he refers to it as the "race to the bottom."

Once the races begin, no currency will be a safe-haven. Only gold will serve its classic role as a preserver of wealth. Once that happens, $800 gold is going to seem like the bargain of the year.

August 19, 2008

China's Inflation Highlights Potential for Gold
(USAGOLD) CHINA -- Despite the global economic slowdown and the threat of a global recession, China is all hustle and bustle. The shops are busy as the rapidly growing middle class spends the wealth generated by three decades of robust and sustained economic growth. Retail sales surged to an astonishing 23.3% year-on-year in July.

While energy and food prices have been retreating in recent weeks, inflation has developed into a real problem here in China. Inflation for 2008 through July is running at 7.5%, well above the government's target.

The Chinese economy relies primarily on exports and investment. Total fixed asset investments in 2008 through June totaled 6.8 trillion RMB, or 52% of total GDP. Other economies tend to range from 20% to 30%. This staggering investment has allowed China to become the world's primary supplier of manufactured goods.

However, China's economic success comes at a price. They have developed an enormous trade surplus and amassed huge amounts of currency reserves. Consequently, there is considerable pressure from the rest of the world to further appreciate the yuan.

As the yuan continues to rise in value, it attracts additional investment capital, further perpetuating the cycle. The People's Bank of China must then inject more money into the system and it is this ever-surging liquidity that drives up prices.

Despite surging retail sales and prices, there is plenty of room for more consumption in China. Of course there is a huge population here and a rapidly growing middle-class, but retail sales are just 38% of total GDP. Compare that to 70% in America and you get a pretty good idea of the potential.

The Chinese have historically been savers, but attitudes are starting change. The younger generations are quite comfortable using credit. Last year, Chinese banks issued 43 million credit cards. In 2003, the number of cards issued was just 3 million. Many young Chinese professionals are proud owners of 'candlestick' (high-rise) apartments thanks to mortgage loans.

The skyline of every Chinese city is a sea of construction cranes as far as the eye can see. Homebuyers borrow from the banks and pay developers for their apartments. Those developers redeposit those funds back into the banks and they are subsequently lent out again. This leveraging of funds creates additional liquidity in the system, driving prices ever higher.

The Chinese have a strong cultural affinity for gold ownership. However, they have only had the right to legally own gold since 2002. In America, we've had the privilege since 1975.

Writing from China I don't have all my research resources at my fingertips, so I'm relying on data several years old. In 2005 Americans owned 1.7 grams of gold per person. In China they owned less than 1/10 of one gram per person.

Given the price risks in China stemming from the liquidity explosion, more and more Chinese will be turning to gold as a means to preserve their newfound wealth. Given the ever tightening supply fundamentals, this potential source of demand is likely to drive prices significantly higher in the years ahead.

August 20, 2008

Getting a Grip on China
(USAGOLD) CHINA -- The last time I was in China, in 2006, the economy was positively booming in the run up to the Olympics. There was a sense of prosperity and potential that was palpable. However, one never can quite get a grasp on this country. Just when you think you have a reasonably true sense of China, you turn a corner and are forced to re-jigger everything in your head once again.

A couple of things have left a lasting impression:

Everywhere you go there are a lot of people. I mean a lot of people. That should not have come as any surprise. I was certainly well aware that the population of this country was approximately 1.3 billion, but for a guy from Denver it's still a little hard to wrap your head around the realities of that number.

We went to a store in Zhengzhou that was the Chinese equivalent of Walmart (right down to the pilfered smiley-face logo). There was literally an employee stationed in every aisle of the store - and there were a lot of aisles.

I was struck by the traffic (not literally, thankfully); the intricate dance of bicycles, scooters, motorcycles, buses, trucks, cars and pedestrians. Despite limited, nonexistent, or simply ignored traffic control, everything flowed smoothly. However, crossing the street in China can be quite an adventure and is definitely not for the faint of heart. The key is never to hesitate, drivers don't expect pedestrians to hesitate or stop, best to keep moving and trust that the cars will miss you.

I noticed the very expensive cars. The nouveau riche of China like European luxury sedans and you can't go more than a couple blocks in a city without seeing a dealership.

Many of the new buildings being constructed had scaffolding made of bamboo. Someone told me that the craftsmen that build the scaffolding -- the joints are tied together -- were some of the highest paid workers on the job site.

There is no OSHA, DOT or public safety organizations here, or if there are they don't have any power. Children ride sidesaddle on motor scooters, sometime balanced atop piles of food or building materials. There are no helmets. Trucks are free to travel the highways with their loads seemingly unsecured. Sidewalks drop off with no railing or warning. The Chinese are obviously not a litigious people.

On this trip, there is still that sense of potential. This time it's all about the Olympic games. The entire country is absolutely abuzz with Olympic fever and this incredible sense of pride.

I stopped at a department store the other night and stood with a group of about twenty shoppers and watched the end of a very exciting volleyball game between China and Japan. The Chinese women won the game and ultimately went on to sweep Japan in the match. The excitement was contagious with much cheering and clapping.

In my meetings around Xi'an, I constantly hear that this is a very special time in China, that the Olympics are here - as if I didn't know. Xi'an is over 500-miles from Beijing and there are no events being held here, but there is obviously a very strong sense of pride in the games.

We were refused permission from the Civil Affairs Office to travel to Weinan City, in part due to security concerns associated with the Olympics. Seems that there are some worries about terrorism. There is a very heavy police presence here in Xi'an. I imagine the police are absolutely everywhere in Beijing.

Just to give you a sense of the 'Olympic premium': the hotel we stayed at two years ago in Beijing was getting $750 a night last weekend when we passed through. In two weeks, when we pass through Beijing again -- after the Olympics -- that same room is $105 a night.

On this trip I seem to be paying more attention to the disparity in wealth. Sure there is whole new class of nouveau riche and an ever growing middle class, but there are still a lot of poor people.

Years of double-digit economic growth can be a wonderful thing, but some ultimately get left behind. I wonder what path China will take after the Olympics. Will the good times continue to roll? The global economy needs some country to carry the ball and China is one of the last best hopes.

However, China's newfound economic power could also pose a threat to the global status quo once the Olympics are behind them and they don't have to worry about any punitive action marring the Games. There has been some speculation that China might look to further diversify their reserve holdings. It's no secret that the vast majority of Chinese currency reserves are presently held in dollars.

With the dollar trading significantly higher, and gold lower, over the past several weeks, now might be the ideal time for China to start unloading some of those dollar holdings. Such a move would simultaneously weigh on the greenback and bolster gold. Such a move would also correspond closely to (and capitalize on) seasonal lows in gold.

China historically used its dollar reserves to buy US treasuries, financing our ever-growing deficits. If demand for treasuries drops, interest rates are going to have to rise, which would have a negative impact on an already vulnerable US economy, not to mention those deficits. Higher interest rates will further tighten US credit markets, which have been on the verge of seizing up for months.

I don't think China wants to destroy their primary market, but they also need to protect their own assets. One thing seems pretty evident; the fate of the US economy is not really in our hands anymore. China is holding, if not all the cards, certainly all the aces.

August 21, 2008

History Repeats Itself Over and Over
(USAGOLD) CHINA -- Gold is showing some upside follow-through in the wake of the move back above $800 earlier in the week. Renewed weakness in the dollar, firmer oil prices and heightened geopolitical tensions between the US and Russia are all helping to underpin the yellow metal.

A breach of resistance at 836.55 would likely encourage a challenge of the more important 845.50/850.00 level, which has proven to be a significant barrier this year, first on the way up and then on the way down as well. A short-term push back above $850 would suggest potential back toward $900.

Relations between the US and Russia were already strained as a result of the Georgian conflict. News that the US signed a missile shield deal with Poland resulted in a strong objection from Russia. Russia also hinted that its missiles would be pointed at Ukraine if they join NATO.

These tensions have been supportive to gold as well as oil. Brent spot crude recaptured the 118.00 level today.

The dollar came under renewed pressure on increased credit crisis concerns. Secret talks between Lehman and Chinese or Korean parties have reportedly ended without success. Meanwhile, shares of Fannie Mae and Freddie Mac remain on the defensive amid worries that a bailout may be in the offing.

If there are indeed more bailouts in the cards, we can expect further expansion of the money supply. That will put additional pressure on the dollar.

You may recall that the US Treasury was allowed to extend lines of credit to Fannie and Freddie last month when that new twist in the credit crisis initially flared. They are even allowed to do outright purchases of shares. After several weeks of assurances that the new facility would not have to be implemented, confidence seems to be waning.

Systemic risks to the US and global banking system are still considerable, and potentially worsening. There is considerable risk that we could see additional bank failures and gold is an excellent hedge against the eventuality.

The euro got a boost from better than expected PMI data, putting the dollar under additional pressure. The EUR-USD rate traded above the 1.4800 level for the first time in a week. These gains bode well for an upside extension into the important 1.4922/79 zone.

The dollar index appears poised to move back below 76.00. If the long-term downtrend in the dollar starts to re-exert itself, inflation is going to remain a major problem. As evidence of this, PPI for July surged 1.2% and the core was up 0.7%.

I read an interesting bit of history about Xi'an today: In the year 190, a warlord named Dong Zhuo moved his court form Luoyang to the more secure city of Xi'an due to a rebellion.

For reasons that aren't entirely clear, Dong Zhuo ordered that statues and bells be melted down and cast into coins. The coins flooded the market and resulted in serious inflation, to the point that the money was soon worthless. Dong Zhuo's reckless behavior made him a prime candidate for assassination. Ultimately it was his own adopted son that did him in.

I believe the old adage goes: Those who forget the lessons of history are doomed to repeat them.

August 25, 2008

China's Growing Middle Class Equates to Growing Demand for Gold
(USAGOLD) CHINA -- Today I am writing from the city of Guangzhou, formerly known as Canton, in Guangdong Province. Guangzhou is a major commercial and manufacturing region in South China and is the economic hub of the Pearl River delta. It is a port city with navigable access to the South China Sea and is just 75 miles up river from Hong Kong.

The Beijing Olympics came to an end last night. I followed the games closely, as I do every four years. These Olympics seemed to be a little different though. Maybe it's just that I happened to be in China during the games. Maybe it's the fact that I have two adopted sons from China. There was certainly a great deal of hype in the build-up to these games, and a great deal of controversy as well.

So the last 17 days have been China's coming-out-party. The world has seen a new and modern China that is also very proud of its ancient past.

I think everyone is aware that a lot of amazing things were invented in China, such as paper, the umbrella, and gunpowder, among many others. Here's one I was not aware of: At the site of the Terracotta Army outside of Xi'an, a sword was unearthed that testing proved had chromium plating 10-15 microns thick. The West didn't have chrome-plating technology to prevent corrosion until the mid-20th century. The Chinese beat us by 2,200 years!

There has been much speculation in recent months about how Beijing, and China as a whole, might benefit from the Olympic games. Beijing has unquestionably benefited from massive infrastructure improvements.

Besides a host of architecturally significant sports venues, there are two new subway lines, along with eight new rail lines -- including a high-speed express line between Beijing and Tianjin. Trains on the Tianjin line can achieve a record-breaking top speed of 220 mph. Capital Airport has a new terminal, a new runway and an express rail line to downtown.

As for the rest of China, there seems to be a strong perception that Beijing's makeover will serve as a model for other cities seeking to improve the general standard of living and attract investment. There are at least 49 cities with populations over 1 million and 5 cities with populations greater than 10 million. The potential for investment and growth is substantial.

Many have suggested that the Beijing Olympics were too extravagant, but if there ever was a country that could afford to be a little extravagant these days, it's China. Unlike Athens in 2004 and Sydney in 2000, the majority of the money has been spent on infrastructure improvement rather than sports venues. Beijing and China will be reaping the benefits of these investments for decades to come.

These investments are also likely to attract additional foreign investment to China. The vitality of China and its vast potential has been on display for the entire world to see. As we have discussed in previous posts, the addition of foreign investment into the already hot Chinese economy forces the PBoC to unleash excess liquidity into the system to relieve upside pressure on the yuan. More liquidity results in currency debasement and more inflation.

All this investment creates jobs and wealth here in China. Double-digit growth along with expansionary monetary policy also puts upward pressure on wages. Each day, more and more Chinese are lifted out of poverty. It is estimated that by 2025 China's middle-class will be the largest in the world, more than 600 million strong. At that point the Chinese middle-class will be nearly twice the size of the entire population of the United States (based on US Census Berea estimates).

That's a mind-boggling figure. Just imagine the consumption and the demand for food and energy. Sure we've seen a pretty steep correction in these commodities of late, but does anyone really believe this retreat in prices is sustainable?

Consider also that the other members of the so-called BRIC nations have rapidly growing middle-classes as well. Between now and 2025, for example, India's middle-class will grow ten-fold.

Given that there is a cultural affinity toward gold ownership in China and India in particular, I think its safe to assume that with more wealth will come more demand for the yellow metal from these countries. Factor in the price risks associated with a middle-class that will comprise over 50% of the global population in less than 20 years and gold just over $800 an ounce is a real bargain. Check that; gold is a steal at these levels.

August 26, 2008

China Ponders 370 Bln Yuan Stimulus Package
(USAGOLD) CHINA -- China is considering a 370 bln yuan ($54 bln) post-Olympic stimulus package to keep the economy rolling along. With much of the rest of the world slowing, China is seeking to offset any negative fallout with 220 bln yuan in government spending and 150 bln yuan in tax breaks. While details of the plan have yet to be announced, the proposal has been approved by the central finance planning team.

As discussed in yesterday's report, the Chinese economy got a considerable boost as a result of government spending on infrastructure improvements in the run-up to the Olympics. Along the way, China attracted significant amounts of foreign investment. Yet the Shanghai Stock Exchange has fallen by more than 50% this year.

With western economies slowing rapidly, there is understandably less demand for Chinese manufactured goods. China is also abundantly aware of the fact that they are very dependent on that demand for job creation. President Hu Jintao is faced with the daunting task of creating 10 million new jobs each year in the face of waning overseas demand for goods manufactured here.

Industrial production slowed to 14.7% y/y in July, a 17-month low. That was down from a 16.0% pace in June and 18.0% in Jul-07. A government effort to reduce pollution in Beijing by curtailing industrial activity probably was a contributing factor to the slowdown, but waning exports are a factor as well.

Chinese exports were growing by as much as 30% y/y as recently as two years ago. While export growth in Q1-08 were still an impressive 10%, the trends in both exports and industrial production are understandably troubling to the government. They raise some doubts about the government's ability to generate those 10 million new jobs.

GDP growth in Q2 was already down to 10.1%, from 10.6% in Q1. The outlook suggests that growth for 2008 could fall below 10% for the first time since 2002. With western economies floundering, where might China look to generate the necessary growth to keep the economy afloat?

The proposed stimulus package will certainly help, but in reality 370 billion yuan is a mere drop in the bucket. The overall Chinese economy makes for a rather large bucket: GDP in 2007 was 24.7 trillion yuan.

The more obvious answer is that they will look inward and seek to stimulate domestic demand. Such a move will also allow China to insulate itself to some degree from external demand shocks. The annualized growth rate for retail sales surged to a record 23.3% in July, a pretty strong indication of the resiliency of the Chinese economy.

With a population of 1.3 billion and a middle class that is expected to grow to 600 million over the next 17 years, the potential for domestic growth is absolutely staggering. Last year, only 38% of China's GDP came from domestic consumption. Meanwhile, in the US, fully 70% of GDP is derived from consumption. Once again, the potential here in China is very obvious, but so are the challenges.

The PBoC will be forced to walk the thin line between price risks and generating enough growth to keep the economy growing and creating jobs. No matter what they do, there is going to be upward pressure on prices as domestic demand for just about everything continues to expand.

Growing domestic demand in China is going to continue to attract strong foreign investment. Fixed asset investment accelerated 27.3% in the first seven months of the year. Such a number, combined with an increase of 25.3% in government investment for the same period, will go a long way toward offsetting any setback in exports.

Nonetheless, exports will still be a mainstay of the Chinese economy. This will challenge the PBoC's ability to keep yuan appreciation in check. With persistent upward pressure on input prices for manufactured goods, managing exchange rates may be the government's best hope for keeping their export prices attractive.

The trajectory of the yuan is already a delicate trade issue. Many countries, including the US, believe that the yuan must be allowed to rise significantly to be in line with China's fundamentals and to curtail any unfair trade advantages.

However, if push comes to shove on trade, China holds the all-important trump card over the US. China finances a major portion of America's debt. They own nearly 20% of outstanding treasury notes. Only Japan owns more. Any hint that the Chinese might start divesting themselves of US debt instruments would send the dollar plunging.

A competitive devaluation of currencies might be the end result, which could sharply accelerate global inflation. The more self-reliant China becomes, the more vulnerable the US becomes.

Gold is the classic hedge against the inevitable inflation that will result from persistent growth in China. In addition, any moves by China to scale back on US treasury purchases, or worse yet, selling of their current holdings, would give gold a considerable boost as the dollar resumes its long-term slide.

August 27, 2008

Chinese Yuan Remains Suppressed
(USAGOLD) CHINA -- It's been slightly more than three years since China freed the yuan from its peg to the dollar. From the early 1990s until July of 2005, the USD-CNY exchange rate was fixed at 8.27, giving China a distinct and consistent advantage when it came to international trade.

The US was, and continues to be, the major consumer of goods manufactured in China. The artificially weak yuan resulted in the US trade deficit ballooning, while China amassed a monster trade surplus and considerable dollar reserves. In the years leading up to the float of the yuan, China was under considerable political pressure from the west.

Don't get the wrong idea though; the yuan is far from being free to find its proper value based on the fundamentals. The People's Bank of China (PBoC) utilized a tightly managed float system to keep exchange rates from fluctuating too widely. Each business day the PBoC establishes a central parity rate for the yuan based on a basket of currencies. Today's parity rate against the dollar was set at 6.8415. The yuan is only allowed to fluctuate 0.5% on either side of that parity rate.

Since the yuan was de-pegged from the dollar on 21-Jul-05, the currency has appreciated 17% against the dollar. China's growth rate warrants substantially greater currency appreciation. However, a stronger yuan cuts into China's already weakening export business.

While China seeks to spur domestic demand for its goods, it remains extremely reliant on exports as a means of growing the economy and creating jobs. As we discussed in yesterday's report, China is faced with the daunting task of generating 10 million new jobs each year. The PBoC faces rather significant policy and political hurdles to facilitate that goal.

At this point the central bank must keep the yuan suppressed to the point where Chinese manufactured goods are still attractively priced, despite waning demand resulting from a contracting global economy. At the same time, they don't want to risk trade sanctions from their biggest customers in the west who consistently point out that the yuan is undervalued and that their own export markets are suffering.

According to a recent Ambrose Evans-Pritchard article in The Telegraph, the PBoC has found some rather creative ways to manipulate the USD-CNY rate. It seems that Chinese banks are required to hold excess reserves in dollars rather than yuan. Since March, the central government has raised the reserve requirements five times.

Reserve requirements are now 17.5% of total lending. As the banks seek to acquire the mandated reserves it has the effect of lifting the dollar and suppressing the yuan, offering relief to China's softening export market. Meanwhile the firmer dollar makes US goods more expensive for foreign buyers.

US exporters saw some relief in recent months as a result of the sharply weaker dollar, but much of that is being reversed out as the dollar has climbed. Yet there doesn't seem to be much protest from the US regarding China's efforts to weaken the yuan again.

This might be explained by the fact that there are political gains to be had. The dollar has firmed significantly in the last month and a half, meanwhile exporters are still reaping the benefits of recent record lows in the dollar. Headlines that can simultaneously tout a firmer dollar and a narrowing trade deficit certainly provide some benefit to the incumbent party.

Look for the trade and exchange rate rhetoric to start up again in earnest after the November election. That's when things could get very interesting. Just be aware that China is going to come to that bargaining table wielding an enormous amount of clout as one of the primary financers of America's massive debt.

The US may ultimately seek to weaken the dollar further to protect gains in exports. However, one can expect China to doggedly defend its exporters as well by continuing to suppress the yuan. To quote another recent excellent article by Mr. Evans-Pritchard: "What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others in a beggar-thy-neighbour policy to shore up exports."

Whether that 'race to the bottom' is about to begin, or is already underway, the ones holding the pieces of paper with the colorful pictures are the ones who suffer, not the ones who issue those pieces of paper. Physical gold ownership is your best chance to reach the finish line with at least a portion of your wealth intact. That is why we at USAGOLD strongly believe that gold is a necessary and permanent component in the modern portfolio.

Gold is bedrock.

September 2, 2008

A Recap on China
(USAGOLD) CHINA -- I am finally back at the office after my 15-day journey around China. The long holiday weekend allowed me to get over my jet-lag and now I'm trying to get back to my normal daily routine. Given that Thursday was a travel day for me last week and Friday was a very long day of touring, I thought I'd take today to offer a wrap-up of my trip.

Before flying back to the States, we spent the last several days in Beijing. While the Olympics were over, the Paralympics were underway and there was still plenty of sports related hubbub going on. Nonetheless, hotel prices had returned to more reasonable levels and we stayed just about six blocks from the Forbidden City.

Beijing was completely transformed for the Olympic games. The city was amazingly clean and there were beautiful flowers and banners everywhere. I read that more than 40 million potted flowers were used to decorate the city. Every major expressway was lined with flowers. The 20km stretch of the Airport Expressway between Capital Airport and downtown was particularly impressive.

Every major expressway also had a lane dedicated to official Olympic traffic. These lane restrictions began on 20-Jul and extend all the way until 20-Sep. Did they do that in LA, Atlanta or Salt Lake City? In our travels around the city over three days, we probably saw twenty official vehicles utilizing these lanes. Nobody seemed to be cheating, even briefly for passing purposes. That includes Beijing cabbies, who can be rather aggressive drivers. I'm guessing the fines had to be pretty stiff.

I was struck by the number of people in Beijing who wanted to take our picture, or have their pictures taken with us. Granted we definitely stood out in the post-Olympic crowd; an American family with two young Chinese boys in tow. We also had a family friend traveling with us that is a six-foot blonde woman. My wife is also quite tall. Perhaps everyone thought they were famous volleyball players.

I guess I was thinking we wouldn't be such a novelty after "The Jing" had been inundated with westerners for the previous weeks. Everyone was exceedingly polite and eager to test their English on us. People who were trying to sneak pictures of us were invited over to have their pictures taken with us. We got a big kick out of it and felt like celebrities.

The building boom in Beijing continues, despite the slowing economy. A long-time resident quipped that the 'construction crane' was the national bird of China. That same person confidently stated that 90% of the world's construction cranes were presently in China. That seemed almost plausible in my mind, although the highest percentage I was able to find from a news source was 64%. Still that's pretty darn impressive. Imagine the demand for concrete, steel, copper and other building materials still being generated by Chinese construction.

As I stood in Tiananmen Square this past Thursday, I couldn't help but think of that lone student standing in front of the PLA tanks in 1989 as they approached the square. The protests that culminated in the Tiananmen Square massacre and the subsequent political crackdown are officially referred to as "The political turmoil between spring and summer 1989." When I stood in that very spot in 2006, our guide told me that she was only aware of what really happened there from what western tourists had told her.

The PRC has worked tirelessly for nearly 20 years to rebuild their global image and in the process they have built an economic juggernaut. The games of the XXIX Olympiad went a long way toward showcasing China's role as a world power. However, in reality, China is at a crossroads.

Over the next several years it will be interesting to see how China chooses to wield its economic and political might. Where will China ultimately come down on the Russia/Georgia conflict? What about Iran and North Korea? I think it is safe to say that the US must take the China-factor into consideration when it comes to just about every global diplomatic hotspot.

In terms of the US economy, China plays an incredibly important role, providing relatively inexpensive manufactured goods. As a result, China has accumulated a huge trade surplus and massive amounts of currency reserves. China is now a major financer of US debt. How might that all play-out now that the Olympics are over? China certainly has the power to further destabilize the US economy and the dollar by ongoing actions to diversify its reserve holdings, allowing its currency to remain artificially weak or simply by buying less US treasuries.

In the wake of the rather dismal Q2 growth numbers from Japan and Europe, one has to wonder if single-digit Chinese growth will be sufficient to support the contracting global economy. GDP growth for 2008 is expected to drop below 10% for the first time since 2002.

There is potential for an economic stimulus package and easier monetary policy, but probably most startling are the central government's plans for ongoing infrastructure improvements. In one of my reports from China I detailed the significant infrastructure improvements seen in Beijing in the build-up to the Olympics. These projects will pay dividends for the city for decades to come, attracting additional foreign investment.

Citigroup has enumerated a number of major infrastructure improvements slated for China, which include:

Plans to double their rail network by 2020.
A 70% surge in the number of airports.
A 75% increase in the number of expressways and a 280% increase in seaport capacity.
The rebuilding of Sichuan province in the wake of the earthquake (expected to cost $150 bln).
An ever-growing need for power is going to require generating plants and expansion of the grid.

As China continues to grow, it will remain a magnet for foreign investment. As wealth is created there the Chinese middle-class will expand further. It is estimated that by 2025 China's middle-class will be the largest in the world, more than 600 million strong. At that point the Chinese middle-class will be nearly twice the size of the entire population of the United States (based on US Census Bureau estimates).

The demand created by a middle-class that size for food, fuel and just about every other consumable is staggering. The potential in China is great, but they won't have to go it alone. The rest of the BRIC nations are likely to provide plenty of growth support as well. One can imagine that inflation is going to remain a significant global problem for some time to come.

If you would like to broaden your view of gold market news and analysis, please feel welcome to join our free NewsGroup to receive by e-mail periodic gold news alerts, USAGOLD Market Updates, and relevant commentary like these.

It seems that China is indeed one of the few best hopes of staving off a global recession. In an environment where established industrial economies are in recession and emerging economies like China continue to drive up prices, adding physical gold to ones portfolio makes perfect sense. It is a hedge against economic uncertainty and systemic risks. Gold is also simultaneously a hedge against broad-based inflation.

I hope you enjoyed reading my reports from China as much as I enjoyed writing them. The overall response has been incredibly positive. While I was overseas, much has transpired in the gold market. Most notably; prices remain under pressure despite an increasingly tight physical supply situation. We'll delve into that topic and the usual supply/demand fundamental starting tomorrow.

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About the author...

Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals. Read more...

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